The recent stock market crash has created a lot of investment traps for share pickers to dodge. I think that the soon-to-be-renamed Royal Bank of Scotland Group (LSE: RBS) is another to be avoided at all costs.
I recently explained why the threat of armageddon for the UK economy poses huge dangers to RBS’s industry rival Lloyds. The outlook is especially worrying for Britain’s biggest mortgage lenders, too, as the Centre for Economics and Business Research (CEBR) suggests.
Fanning fears around the housing market, the body predicts that property prices will sink 13% during the 12 months to March 2021. The guidance follows government advice published last week for homebuyers to “delay moving to a new house while measures are in place to fight coronavirus.”
A recent report from Zoopla illustrates the huge impact that the Covid-19 breakout is having upon the homes market, too. This says that new sales enquiries had tanked 40% during the week to 22 March, i.e., before that government advice even came out. The number of new sales dropped 15% year on year too, it said.
The property listings website thinks things could get much worse as well. It reckons that the number of homes sold in Britain could tank by as much as 60% during the June quarter. Tough conditions could also spill over in the third quarter of 2020, Zoopla comments.
Under pressure
So why is RBS – or Natwest Group, as it is soon to be known – quite so vulnerable to this? Well it’s one of the country’s largest mortgage lenders and stands to lose considerably as home loan demand likely sinks. The bank is the country’s fourth-largest lender and commanded a near-10% market share as of 2018, according to UK Finance.
The FTSE 100 business can ill afford a sharp decline in mortgage lending. The bank’s operations on this front are already being plagued by rising competition in this particular segment, in part a reflection of the emergence of challenger banks. It’s a problem that pushed RBS’s net interest margins to 1.93% in the final three months of 2019. This was down four basis points from the previous quarter and a full 0.1% lower from the corresponding 2018 quarter.
Another to avoid
It’s not as if RBS, like its peers, doesn’t have enough on its plate for this new decade. Sure, the period of crushing PPI-related penalties might finally be over. But with Brexit already clouding the outlook for the 2020s, and the recent Covid-19 outbreak and prospect of a painful and prolonged recession, the risks for this Footsie share are unacceptably high. At least for this particular share investor.
I’m not moved by its huge 12.1% dividend yield for 2020. Nor am I impressed by its corresponding price-to-earnings ratio of below 7 times. City analysts expect earnings at RBS to almost halve this year alone. I think investors need to brace themselves for further profits pain over the short-to-medium term, too.